For many small business owners and startup founders, Regulation A+ crowdfunding has tremendous appeal. It can be a chance to raise the money needed to expand, while simultaneously providing opportunities for greater exposure. What isn’t always known is how Regulation A+ funding works, how it differs from a traditional IPO, and what its pros and cons are.
If these are the questions you’ve been thinking through, the next few sections will help. Together, we’re going to walk through everything you need to know about Regulation A+. By the time we’re done, you’ll be better prepared to grow your business in a way that makes the most sense to you. Let’s dive in!
What is Regulation A+?
Regulation A+ is a funding offer that allows private companies to raise up to $75 million. It was signed into law on April 5, 2012. While a variety of other investment opportunities are only available to accredited investors, Regulation A+ is open to the general public as well.
Regulation A+ shares some similarities with IPOs (i.e. a business’s initial public offering), but includes a few helpful distinctions. For example, the fees inherent to Regulation A+ are significantly lower than a traditional IPO. Additionally, Reg A+ has ongoing disclosure requirements that are less burdensome than an IPO. For these two reasons, Regulation A+ is often referred to as a mini-IPO.
Regulation A+: A Two-Tiered System
As with all things related to investments, Regulation A + is governed by the Securities and Exchange Commission (SEC). Per SEC rules, Regulation A+ is divided into two tiers of offerings.
Under Tier 1, a company may raise up to $20 million in a 12-month period. The offering must be filed with the SEC (where it will be subject to review and qualification by both general staff and regulators overseeing states where the offer is being conducted). Financial statements must be disclosed in a Tier 1 offering, however, they are not required to be audited.
Under Tier 2, a company may raise up to $75 million in a 12-month period. Again, filing is required, and that filing is subject to review and qualification by SEC staff — but not the state-specific regulators who oversee Tier 1 offerings. Financial statements disclosed in a Tier 2 audit will require an audit by an independent accounting firm
Who Can Use Regulation A+?
Regulation A+ may not be right for every founder or business owner, but certain companies will certainly benefit from it. If your business falls into any of the following categories, Reg A+ may be worth pursuing.
Businesses That Would Like to Raise Between $3 – $75 Million
Like all fundraises, there are costs associated with Regulation A+. For companies looking to raise less than $3 million, those costs will most likely be prohibitive. If you’re a smaller business owner who needs fresh ideas for connecting with investors, this how-to guide will help.
Companies That Are Customer-Facing and Value-Driven
Reg A+ investors frequently look for businesses that offer products or services they already buy or believe in. Because of that, consumer-facing companies with clear value propositions are excellent candidates for Regulation A+.
Businesses With Large, Highly Engaged, Audiences
The success of your Regulation A+ fundraise depends, at least in part, on the size and enthusiasm of your audience. Customers who are engaged and excited about your company are natural investors who can drive the momentum you want.
Companies That Want to Grab Attention
Regulation A+ is fundamentally about raising capital, but the process has fringe benefits as well — including building brand awareness, customer engagement, and large-scale publicity. As you begin to structure your Reg A+ offering, think about it like a product launch. This is your chance to make a big splash!
Why Would I Do a Regulation A+ Offering?
If your company meets the criteria above, there are several reasons why you should consider doing a Reg A+ offering. Here are the top four:
To Incentivize Early Adopters
If your company is entering a growth phase, you didn’t get there alone. Some of that success is due to your early adopters — the people who believed in your business before anyone else. Regulation A+ fundraising is a way to offer a financial stake in your business and a chance to share in your continued success.
1. To Galvanize Your User Base
The only thing better than a customer or client is a brand evangelist. These are the people who love your business enough to tell their friends and family about it, or post about your company on social media. A Reg A+ round of funding is an opportunity to strengthen that relationship even more.
2. To Keep Control of Your Company
One distinct advantage of Regulation A+ is that it allows your company to raise large amounts of money from a large number of investors. On average, most people will have only invested a small amount of money, but that allows ownership to be spread broadly. In most Reg A+ offerings, companies will not give up board seats or other incentives that result in the loss of control.
3. To Process Capital Efficiently
A Regulation A+ offering empowers businesses to connect with engaged investors and compel them to act. By making the offer available and telling the right story to the right audience, companies like yours have the potential to raise a significant amount of money quickly and efficiently.
Concerns to Consider: What Are the Downsides of Reg A+?
Like any investment offering, Regulation A+ has drawbacks that have to be acknowledged and prepared for. If you decide to go the Reg A+ funding route, have a plan in place to deal with the following:
— Regulatory approval may take as long as 90 days prior to closing investments
— A larger investor pool, will advantageous in many ways, can be difficult to manage
— The Tier 2 requirements for ongoing public disclosures may be cumbersome over time
Frequently Ask Questions:
When do I have to commit to holding a Reg A+ offering?
Not until you’ve done your homework. Make sure you meet the criteria, take time to hone your company story and vision, and nail down the ways in which your offer can operate as a buzzworthy launch as well.
How is Regulation A+ funding similar to going public?
Reg A+ actually has more in common with traditional fundraising (e.g. Regulation D) than an IPO. The most obvious similarities are the ability of the company to raise capital from all types of investors and the inherent regulatory overview.
My startup isn’t quite at this level yet. How can we craft a more compelling story that reaches a wider audience?
If you’re not at the point where raising at least $3 million seems feasible, don’t worry. That day may very well be around the corner. Until then, we can help.
At The Main Stage, we work with startup founders just like you to build highly engaging, multimedia pitch presentations — the kind that get investors’ attention and compel them to act.
After that, you’ll be able to share this highly-polished pitch with your connections safely and easily. You’ll even be able to see who’s viewed your offer, follow-up, and cultivate these growing relationships all within our CRM system.
Finally, our Data Vault is your secure document storage portal — keeping your correspondence compliant, safe, and worry-free.
We call this “the future of fundraising,” and we think you will too. Click here for a free 14-day trial. It’s the all-in-one platform your startup needs to succeed, and it’s only at The Main Stage.
Jessica Smith is Principal Partner of The Main Stage where she oversees business development and operations for their digital StoryVault™ investor platform. Prior to joining The Main Stage, Jessica served as COO for Westlake Realty Group and its affiliate companies. She also held various leadership positions in Boston, Seattle and the Bay Area with the RMR Group, (Nasdaq: RMR), an alternative asset management company, and Westcore Properties based out of San Diego. She is also an advisor to Music and Medicine, an initiative that connects innovative healthcare startups to musicians to help tell their story and facilitate impact. You can connect with Jessica on LinkedIn.
The Main Stage Adds Principal Partner; Expands Reach By Empowering Healthcare Fundraising
MILL VALLEY, Calif., June 29, 2022 /PRNewswire/ — The Main Stage (www.themainstage.com), a software technology company that enables startup founders and entrepreneurs to engage with prospects and investors in an efficient and engaging experience, is excited to announce a licensing agreement with RedCrow.
RedCrow is an alternative investment platform that provides investors access to expert-vetted healthcare startups. It was recently acquired by Boston-based Alira Health, a global healthcare advisory and technology company.
RedCrow VP of Business Development, Suzy Engwall, had this to say about the new partnership: “RedCrow, an Alira Health company, is excited about the license agreement with The Main Stage. This software allows startups to tell their whole story and engage with potential investors in a truly unique way. Companies are able to showcase so much more than what one would get out of a traditional pitch deck alone. The Main Stage blends the power of storytelling with a backend CRM that enables companies to interact with their investors in a more timely, compelling, and efficient manner. We see this new partnership as a game-changer for fundraising and compliance in healthcare innovation and beyond.”
The Main Stage supports startups with engaging and interactive pitch development, investor relationship management, and secure document storage. Their proprietary software has been called “the future of fundraising,” and is designed to build investor excitement and compel action. Through their strategic partnership, The Main Stage will collaborate with RedCrow to create a white label version that supports healthcare companies in their private and public fundraising efforts.
With the addition of Jessica Smith as Principal Partner, The Main Stage is poised for future growth. Smith, the former COO of Westlake Realty Group and a prominent business advisor, said “I am excited and energized to join The Main Stage. I believe this technology will enhance and redefine the investor and company experience when it comes to raising capital and presenting a compelling story.”
The Main Stage is headquartered in Mill Valley, California. The company was founded in 2020 by Jerry Harrison, an entrepreneur and former member of the band Talking Heads, former Morgan Stanley financial advisor Brian Smith, and Aishlin Harrison, a passionate entrepreneur, artist, and musician.
We’ve written these words before but they’re worth repeating: the success of your startup takes more than just a clever idea or working product. Launching — and eventually scaling — a business requires money. Sometimes lots of it.
For most companies, that kind of capital is raised through various rounds of funding. The seed funding round has the potential to turn hopes and dreams into reality. At the same time, poor execution at this stage can be catastrophic.
Good news: catastrophes are easier to avoid when the steps are clear — when forward progress has a plan, and potential pitfalls are wrapped in caution tape. That’s our goal here: to provide a practical, how-to guide for understanding seed funding.
What Is Seed Funding?
First of all, let’s clarify what seed funding is not. Seed funding isn’t a loan. Instead, it’s an opportunity for investors to exchange funding for an ownership stake in your company, a share of the profits from your business, or both.
Why Do Startups Need Seed Funding?
Seed funding is what allows your startup to:
Hire more people
Expand into other markets
Increase production
Invest in better equipment
Enhance your technology
…and so much more
Seed funding is also a precursor to venture funding, where dollar amounts become larger and a company’s footprint has the ability to grow exponentially.
Seed Funding Breakdown: Where Does the Money Come From?
Seed funding can come from a variety of sources. Here are some of the most common:
1. Incubators and Accelerators
For early-stage startups, incubators can be an initial source of seed funding.
Of course, incubators are primarily known for nurturing innovation and helping generate ideas, but small investments are often one aspect of their strategy as well.
The investment aspect is especially true for accelerators because growth is their primary focus. With set funding amounts available in exchange for a percentage of your company’s equity, acceptance into an accelerator program can provide a quick infusion of cash.
In both scenarios, additional help — like tech support, access to shared workspaces, and mentorship — is often available.
2. Crowdfunding Platforms
Although crowdfunding is still relatively new, its growth and popularity are steadily increasing. With multiple platforms to choose from (including some that are industry-specific, like RedCrow), seed funding via the crowd — from everyday people to business leaders — has the potential to bring in significant amounts of money.
It’s important, of course, to understand the terms upfront. Not only do you need to know what you’re required to give in exchange for the capital, but you’ll want to understand what fees the platform charges too.
3. Angel Investors
Let’s clarify something up top: For many startup founders, finding an angel investor might feel like the dream. In reality, it might simply be a piece of the puzzle. Angel investors can quickly infuse cash into your business — money that has the ability to solve many of your financial headaches. That’s welcome news.
But angel investors are not a must-have. They are nice to get on board, but they are not a requirement.
Bottom line: angel investors are individuals with a high net worth who exchange seed funding (and sometimes venture capital) for a percentage of ownership in your company. Angel investors receive pitches, decide who they’d like to meet with, and control the terms of the deal from start to finish. Before working with an angel investor, make sure you understand those terms and are happy with the deal you make.
4. Corporations
That’s right. Large corporations — think Apple, Google, etc. — often provide seed funding to startups, especially if the product or idea is within their interest or industry. Even if it seems like a long shot, remember that a multifaceted approach to seed funding tends to be the most successful. Don’t hesitate to reach out to corporations you think might be a good fit.
5. Personal Savings
Finally, many startup founders will use personal savings as a way to get their business off the ground. Frequently referred to as “bootstrapping,” the idea includes upsides and downsides.
The upsides are simple but effective: using your own money doesn’t come with equity tradeoffs, interest, or repayment.
The biggest downside is that bootstrapping might make increase financial pressure on the founder or founders.
6. Bank Loans
A personal or small business loan may be another effective way to gain some seed funding. In most cases, this type of loan will require some form of collateral and will include interest and a schedule for repayment. Still, options exist, and traditional banks or credit unions can be an additional source of funding.
How to Get Seed Funding for Your Startup
With all of these possible sources of funding, you may feel a little overwhelmed. You know your startup needs funding, and you have an idea of where that funding comes from, but you may be less sure how to get it. This is a legitimate concern, but we’re going to walk you through some steps.
Step 1: Attract the attention of investors
That may seem easier said than done, but it may not be as hard as it sounds. Here are a few concrete ways to increase the chances that an investor will find you:
Network — in-person and online
Attend conferences specific to your industry or area of interest
Get active on social media
Step 2: Learn how to talk about your company
If you think you already know your talking points, keep reading anyway. This idea might be new to you.
To engage your audience and have them wanting to know more, your product or idea needs to be known for solving a problem. What is that problem, and who does it impact? When you talk about your company, it’s important to start there — with the problem you solve.
After that, you need a clear way to introduce your company — the very thing you’ve come up with to solve the problem you just mentioned. How does your startup address that problem? Use simple language and keep it short.
Finally, what’s the payoff for someone who uses your product? In other words, with their problem now solved, how does life — in both big and small ways — improve?
When you learn to talk about your company in this way, you accomplish two things: you begin to effectively engage your audience, and you learn how to compel them to act. When you’re speaking to investors, the action you’re asking them to take is funding-related. With that in mind, they may have some immediate follow-up questions.
Step 3: Learn how to share your data
If the story of your company is what engages and compels, the data is what supports that overall narrative. When we talk about those numbers, they need to include the following:
Your business plan
Real and/or projected costs, revenue, and growth potential
The amount of funding you need
How that funding will be utilized and what it will produce
Strengths and weaknesses
Future opportunities and potential threats
When you’re speaking with an investor, you need to paint a picture of where your business fits into — or even potentially disrupts — the market.
Knowing How Much Seed Funding to Ask For
Determining how much seed funding you need is critical, and this easy-to-follow formula can help you do the math.
Multiply your current monthly costs by the number of months you’ve projected to get your business off the ground. Once you have that number, add a reasonable percentage to account for unexpected issues like delays and/or increased costs of materials or services.
Here’s the bottom line: the amount of seed funding you’re able to generate will depend on the value of your company — even if that value is initially based on projections. Over time, that value will shift to things like assets and intellectual property. Either way, you cannot effectively ask for funding that exceeds the value of your business.
Knowing the Right Time to Raise Seed Funding
As with most things, the success of your seed funding will depend largely on timing. If you try to raise funds preemptively, you may not have all the pieces in place to attract investors. Here’s a checklist that will help you. Once you’re able to answer “yes” to the following questions, you’re ready to raise seed money in a way that’s sustainable and beneficial to the life of your business.
Do you have a minimum viable product (MVP)?
Can you demonstrate that your product or idea works and that a market for it exists?
Is there evidence of interest in your product — ideally revenue, but also users, followers, signups, etc.?
Are key personnel in place and capable of driving growth?
Seed Funding Essentials: The Power of the Pitch Deck
Your responsibilities as a startup founder are extensive, and they aren’t limited to raising funding. Securing the capital you need is important, but in the day-to-day life of your company, so are countless other things. The reality is that you can only do one thing at a time — at least if you’re trying to do it well. And while you may not be able to clone yourself, you can duplicate your efforts. That’s what a pitch deck is for.
Meeting with every potential investor face-to-face would be wonderful if it were possible, but there aren’t enough hours in the day. A high-quality, comprehensive, and interactive pitch presentation puts you in the room with your intended audience. There’s only problem: Not every pitch deck can pull this off. In fact, most can’t. They’re one-dimensional slide shows that fail to engage or compel their audience. You deserve better, and so do they.
If you’re having second thoughts about your own pitch deck, we can help turn things around. At The Main Stage, we’ll help you craft the kind of story that resonates with potential investors — blending engaging graphic content with compelling video features that allow you to demonstrate your product or idea. On The Main Stage, you’ll bring your story to life in ways that let you stand out from the crowd of one-size-fits-all pitches. We call it the future of fundraising because it is!
Creating Your Investor List — Here’s How
Here’s a bit of advice: start where you are, and with who you know. You may not be personally acquainted with Mark Cuban. That’s okay. You probably know another founder, small business owner, or entrepreneur. Buy them a cup of coffee and spend a few minutes asking questions. They’ve probably been in your shoes and may be able to point you in the right direction.
The startup incubators and accelerators we mentioned earlier can be helpful too. These programs can be a natural on-ramp to networking events and mentorship opportunities, and provide direct access to interested investors. Even online platforms like LinkedIn can be excellent starting points for putting a list of potential investors together.
Here are a few pieces of homework to do as you build your list:
Do the people on your list have a track record of investing in startups in your industry and location?
Can they offer additional guidance — like practical advice or industry expertise?
How have their previous relationships with founders typically developed, and were those founders satisfied with how the relationship played out or ended?
Did these same investors participate in additional funding rounds?
Working through these questions will help you target the investors best suited for the needs and wants of your startup. You shouldn’t be prepared to accept money from just anyone, especially when equity in your business is up for grabs. The investors you work with need to be people you like, trust, and respect. Investors choose your business, but you are also choosing them when you agree to the terms of a deal. Here are five questions to ask yourself when making that decision.
Five Steps for Choosing the Right Investors
Do I want a hands-on investor who’s actively involved, or would I prefer someone who stays in the background?
Have their previous investments been successful, and if so, how long did success take?
Do I have a funding goal and is it clearly stated in my business plan?
Can the investors on my list offer help beyond funding?
Is each potential investor a good fit for my business?
The Importance of Managing Equity During Seed Funding for Startups
As your seed funding round takes shape, one thing is sure to happen: you will begin to give up equity in your startup. The thing that was once 100% yours — or at least belonged to you and one or more co-founders — will soon belong to other people too.
Before this happens, it’s crucial that you have a capitalization table (also known as a cap table) in place.
A working cap table should include all of your company’s equity ownership, which you’ll need in order to calculate market value. Your cap table will also need to include total funding amounts received since inception, ownership shares, and share prices. If an organizational chart illustrates personnel power in your business, a cap table demonstrates the financial power of your business.
Key Takeaways
Depending on the needs of your startup, gaining the seed funding you need can be a challenge. That said, we think you’re up for it. Having a plan in place makes a huge difference, and who you decide to partner with when the time comes is just as important.
We want to help you prepare to thrive. You deserve to tell your story in a way that inspires confidence and builds curiosity. That’s hard to do when your presentation looks like everyone else’s. We’ll help your harness the power of your who your company is and how it’s different.
Beyond our exclusive StoryVault™ platform, The Main Stage includes a powerful CRM system that allows you to track investor interest and tailor specific follow-up communication all with the click of a button. And when it’s time to close the deal and receive your funding, our Document Vault is a secure storage solution for investor correspondence and compliance.
Attracting the right investors can be tricky, but we make it easier. Click here to start your free 14-Day trial and see for yourself what The Main Stage can do for you!
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Aishlin Harrison is the co-founder of The Main Stage, as well as an artist, musician, and passionate entrepreneur. In addition to these roles, she serves as The Director of Operations and Marketing for RedCrow™, Inc., a direct investment and marketing platform for healthcare companies. You can connect with her on LinkedIn.
If you’re a startup founder, coming up with the idea for your business might feel like it was the easy part. Even if it took years of late nights, rounds of revisions, and countless starts and stops, you did it. Maybe you’re doing it right now.
Either way, your idea has probably always felt like it was within your control. Even if there’s a team of decision-makers involved, you all are still calling the shots. If you want to change something, you do. When something isn’t working, you scrap it. Why? Because you’re in charge. Finding people to invest in your business can feel the exact opposite. All of a sudden you have what seems like little control over whether or not they like your idea – much less when or if they decide to invest significant amounts of money into your business. Ultimately, it can feel risky – but consider this quote from Susan Wojcicki, CEO of YouTube: “Life doesn’t always present you with the perfect opportunity at the perfect time. Opportunities come when you least expect them, or when you’re not ready for them. Rarely are opportunities presented to you in the perfect way, in a nice little box with a yellow bow on top. Opportunities, the good ones, they’re messy and confusing and hard to recognize. They’re risky. They challenge you.” That tension between control and risk is real, but it doesn’t have to overwhelm you. When done correctly, finding people to invest in your business can be one of the most exciting parts of your job. This step-by-step guide will help you get started, teach you how to build strong investor relationships, and implement strategies that work. You may not be able to control everything, but that doesn’t mean you can’t control some things.
Why Small Business is Big
There’s some good news for entrepreneurs and startup founders right out of the gate: finding investors and raising capital for a small business can be easier than for larger, more established companies. Here are three reasons why:
A Little Money (Goes a Long Way)
While a big company may not even accept investments below six figures, $10,000 might be a gamechanger for the life of your startup.
Lower Barrier to Entry
Not every investor can write a million-dollar check. However, finding ten people willing to invest a few thousand dollars apiece is significantly easier.
Higher Risk = Higher Reward
Investors are diverse and include those that specifically enjoy higher risk/higher reward partnerships with new startup founders. They do exist. You just have to find them.
How to Find Investors for Small Businesses – The Top 5 Ways for a Startup to Get Capital
Okay…that was encouraging, right? We think so. Still, success takes more than a pep talk. You need practical steps. With that in mind, here are the top five ways to find investors and raise the capital your business needs.
Begin By Asking Your Family and Friends
Wait…before you throw your phone or break your mouse, you should know something important: we’re not suggesting you ask to borrow any money here. If that’s what’s causing you to cringe at even the thought of discussing this with your family or friends, think again.
This is not a loan. This is an opportunity to invest – to make their money back and then some. After all, the people you’re closest to know you better than anyone else. They’ve seen your drive, they know your dedication, and they believe in you. In turn, you believe in yourself and your idea. Asking your friends and family to invest is a way of inviting them to be active participants in your dream and recipients of your success. You can feel good about that.
Apply for a Small Business Administration Loan
Unlike your family members or close friends, the Small Business Administration doesn’t get involved with investing, however, they do provide loans for qualified applicants. One of the most advantageous SBA options for startups is their microloan program. While the average microloan is around $13,000, the program provides loans up to $50,000.
Before you apply, be aware that loan proceeds cannot be used to purchase real estate or pay existing debts. However, that means you’re free to rebuild, re-open, repair, enhance, or improve your small business. That includes expenses associated with inventory, machinery, furniture, fixtures, equipment, supplies, and working capital. A microloan may not give you everything to get your business off the ground, but it can be part of your financial plan.
Consider Private Investors
With the right group of private investors, it’s possible to raise all of the capital needed to launch and grow your startup. We’ll provide more information below to help you understand what these investors are looking for – allowing you to tailor your offering and maximize interest – but here are some basics to consider:
Before pitching your idea to an investor or venture capital group, know the amount of funding you need, and be prepared to explain what that money will allow you to accomplish. Then, make sure your pitch is polished and practiced. After that, do your research. Are there local VCs you can meet with in person? Do you know of an angel investor you can reach out to? Put the internet – including LinkedIn and other online networking sites – to work for you.
Contact Businesses or Schools in Your Field of Work
Sometimes finding an investor is as simple as a meeting over coffee. At other times, more steps are involved. Building a solid financial foundation for your business will require some of both. If there are businesses or schools nearby that focus on or specialize in work that overlaps with your product or idea, get to know them.
Discovering an investor in either group isn’t a guarantee, but both businesses and schools have large networks – groups that are sure you include people interested in what you’re doing. You may also find connections you hadn’t expected, like manufacturers, suppliers, and other small business owners who may help you advertise, stock your products, or recommend you to their customers.
“The natives of Silicon Valley learned long ago that when you share your knowledge with someone else, one plus one usually equals three. You both learn each other’s ideas, and you come up with new ones.” – Vivek Wadhwa
Try Crowdfunding Platforms to Find Investors
There are good reasons crowdfunding platforms have grown in popularity: they tend to produce results. Some caveats exist, of course, but online crowdfunding – like SBA loans and angel investors – can be another exciting piece of the fundraising process. Understanding your audience and what will compel them to act is critical.
The crowdfunding campaigns that succeed all have a few things in common:
an attainable funding goal
more than one investing level or tier
direct incentivization
Although the individual investments tend to be much smaller (anywhere from $25 to several hundred dollars), more people – especially those who might not consider themselves to be investors – can participate. This can build positive buzz and a sense of excitement that may very well draw the attention of even larger audiences and bigger investors.
Frequently Asked Questions
“What Do Investors Look For?”
The first thing investors look for is an engaging story, which is why your pitch is so important. Your pitch is more than a mission statement, a series of bar graphs, or a prototype. All of those pieces may be included in your company’s story, but in a way that tells a story – one that draws an investor in and compels them to act.
Beyond that, investors look for founders who are bold, but who remain teachable in the areas outside their expertise. Investors want opportunities to make an impact – in other words, to feel like their money is making a difference. They also want to know that their questions – which they may have many of – will be answered thoughtfully and that any insight they might have will be taken into consideration.
“What Is a Fair Percentage for an Investor?”
The answer to this question varies depending on how much someone is willing to invest. On the low end, an investor gained through a crowdfunding platform may become eligible for a substantial discount once your product hits the market. In the meantime, you may choose to outfit them with free branded products, like stickers, a t-shirt, or access to an exclusive online community.
Angel investors or VCs aren’t nearly as motivated by swag. Building a working relationship with this type of investor will likely mean trading a percentage of ownership in your company for a significant infusion of capital. That percentage could be relatively small – perhaps 25% – or it could be full ownership, making you an employee. Having a plan, knowing what you’re willing to do, and sticking to your strategy will help you navigate each opportunity.
Finding Investors for Your Business: A Recap
Discovering, meeting with, and successfully onboarding new investors for your startup doesn’t have to feel overwhelming. It can be one of the most rewarding aspects of being an entrepreneur or founder. Family, friends, and private investors can all be part of your funding plan. You may even decide that a small business loan is needed, or you might put the power of crowdfunding to work for your startup. No matter what, you need a plan – one that begins with a great story.
Great stories are what get all of us to lean in a little closer, listen with more interest, and imagine ourselves getting involved. Here’s how we can help you tell your story in ways that matter most.
Putting The Main Stage to Work for You
The Main Stage is built around the things startup founders and business creatives need most:
A platform for designing and sharing beautifully made pitches that draw a crowd
A built-in software that makes tailoring emails and managing investor relationships easy
And a secure document vault for storing investor-related correspondence
The Main Stage is the future of fundraising and now is your chance to join us. If you’re ready to get started, we’re ready to help. Click here to sign up for a free 14-day trial.
Aishlin Harrison is the co-founder of The Main Stage, as well as an artist, musician, and passionate entrepreneur. In addition to these roles, she serves as Creative Advisor for RedCrow™, Inc., a direct investment and marketing platform for healthcare companies. You can connect with her on LinkedIn.
Are you someone who thrives on winging it – on showing up to a crucial meeting or an important presentation without much preparation or practice? Probably not. In fact, if you’re reading this, your goal is most likely the opposite. As a founder or entrepreneur, you understand that preparation is an integral part of success. Everyone wants to be polished, and that bar is set pretty high, right? You reach it, of course, through a lot of hard work. Preparation and practice are the “wash, rinse, repeat” of startup success.
If you’re all in, then keep reading. We’re about to take your prep work to the next level.
How To Have a Competitive Advantage in Your Pitch Meetings
Keep that word in mind, will you? Preparation and practice are all about gaining an advantage. Venture Capitalists sit through a lot of pitches. That’s part of their job. Emily Weiss, CEO and Founder of cosmetics company Glossier, said that “so much of venture capital is pattern recognition.” It’s true. Having a quick way of separating the good from the bad makes their jobs easier.
Here’s something you should know: good and bad have more to do with preparation than products or ideas. You can have a brilliant idea and still bomb your pitch meeting if you show up unprepared.
When you’re able to explain your business and can answer each question that is fired your way, it indicates a level of seriousness and commitment – that the process of launching a company and raising equity isn’t a game to you.
This is the founder you want to embody, and becoming this kind of a leader takes effort. A lot of that work involves knowing what type of questions investors may be asking and having a plan to answer them.This is where we can help.
The Questions VCs Ask Depend on the Stage You’re In
VCs tend to ask the same questions because they have a system for finding strong investment opportunities – and because they know how to expose holes in your product, plan, or model. Some of those questions will come up early, like during pre-seed funding, and others will emerge in later rounds. The stakes are high, and your job is to be ready.
Since the majority of startup founders are in or between the pre-seed and seed stages of fundraising, we’ve organized the questions you’re most likely to be asked into those two categories. We’ve also included an effective way to turn the tables and ask some important questions of your own at the end! You’re not going to want to miss that.
Pre-Seed Questions
Pre-seed questions typically focus on as many as seven distinct categories: the team, the market, the competition, financials, legal, market validation, and your competitive advantages.
Remember: Pre-seed investors, whether they are traditional VCs or angel investors, are basically investing in you – in your ability to do the thing you say you’re able to do. The questions in this stage of funding reflect that.
The Team
What expertise or background do you have in this industry?
How are responsibilities shared within your team?
What history does your team have working together?
Are you fully committed to this business, or do you have other commitments?
How do you and your team measure success and failure?
The Market & Your Product / Offering
Why is now the right time to bring your idea or product to market?
Who is your customer base or target market?
What makes you believe that your company has high growth potential?
How long will it take to achieve market impact or disruption?
What is your TAM (total addressable market), and how will you achieve it?
The Competition
Everyone has competition. Who is yours?
What does your competition do well that you’ve yet to achieve?
What do you understand about the market that the competition does not?
Are you more or less expensive than the competition?
How do your features and/or benefits compare to the competition?
Financials
How long until your business is profitable?
What are your three-year financial projections?
How much future debt or equity financing do you think will be necessary?
What is your projected burn rate?
What are you basing all of these projections on?
Legal
What, if anything, is your corporate structure/status?
If you incorporated, in which state or country was your company formed?
What pieces of intellectual property – including domain names, URLs, patents (pending or otherwise), trade secrets, trademarks, and copyrights – does your company possess?
What due diligence has been performed to ensure that your company’s intellectual property does not infringe on the third-party rights of any other person or entity?
Would any employees (current or former) or their previous employers have a potential claim against your company’s intellectual property?
Market Validation
How can you demonstrate that demand exists for your product or service?
How do you know that customers want or need what you’re selling?
Have you built – and subsequently tested – a minimum viable product (MVP) in the market?
How did you find research participants, and how were results analyzed?
What sort of SEO analysis did you perform to gauge interest or demand?
Competitive Advantages
Is anything new or disruptive about your product or service?
Why aren’t other companies already doing this, or why might they have chosen not to?
How is your idea different from the rest of the industry?
Do you have any “unfair” advantages?
What do you understand that no one else has figured out yet?
At first glance, this may seem like an overwhelming number of questions, but many of them overlap with each other. Much of the work of preparation and practice is developing clear and concise answers to very specific questions. Focus one or two in each of these categories. Write them down on index cards and have your co-founder, a team member, partner, or friends pull questions at random. Not only will you hone your pitch, but your answers will become polished and predictable.
Seed Questions
Seed questions typically fall into nine categories – many of which focus on price, demand, and ability to scale. They include: your team, business model, the product and technology, market, growth opportunities, traction, intellectual property, existing financial round, and intended use of funds.
Remember: at this stage, seed investors are still interested in you, but now “you” includes a track record that is tangible and quantifiable. None of these questions should surprise you, so do your homework. Know what will be asked of you and prepare a straightforward answer.
Your Team
Where is your business headquartered?
Who are the founders, key members, and what are their responsibilities?
What about board members?
How has any internal conflict been handled up to this point?
Have any founders expressed interest in being bought out?
Business Model
What is your current cost of acquisition per customer?
What are your profit margins – and how will scaling impact those?
How has your business model changed since your initial launch?
How many paying customers do you have right now?
What’s a real customer interaction you’ve had that supports your business model?
The Product and Technology
How has your product or service evolved from earlier versions?
What key features do you plan to add in the next 6-12 months?
Has user behavior surprised you or influenced design decisions?
Can you show me how the product works?
From prototype to current version, if you could do one thing differently, what would it be?
Market
What percentage of the market share can your business realistically own?
Who is your best customer and why?
Do you have a PR strategy? If so, what is it?
Who do you admire in your market or industry?
What’s a danger in your market or industry you’d like to avoid?
Growth Opportunities
Where will new users/clients/customers come from?
What is your user growth rate?
What is your current conversion rate?
What advertising will you do with additional capital?
Is there a way to reduce your per customer acquisition cost?
Traction
How many users, and how long do you retain them on average?
What is the total number of sales to date?
What is your annual growth rate?
What feedback – positive and negative – have you received so far?
Have you made any changes based on that feedback?
Intellectual Property
Have you discovered any legal or product liability issues?
Who has (and who continues to) develop your intellectual property?
What, if any, new patents do you have pending?
Are there any regulatory risks you’re aware of?
Have any partners or employees left the company that may claim ownership of your intellectual property?
Existing Financial Round
Do you have an exit plan – including M&A or IPO?
What is the timeline for this?
What is your current valuation (and how is that being determined)?
How much capital are you trying to raise now?
Are any previous investors participating in this round of fundraising?
Use of Funds
How will you allocate these funds between overhead and growth/expansion?
What technology will you be able to purchase with this money?
How much of this money will be spent on hiring more people?
What if you’re not able to raise enough money?
What are the risks and how are you mitigating them?
Again, many – if not most – of these questions are the same ones you ask yourself, your partners, or your co-founders regularly. At this stage of your company, questions about traction, growth opportunities, and how to allocate an infusion of capital are commonplace. If they aren’t, they should be. Don’t hesitate to work out your answers within a team. Come to a consensus, write down clear language that answers all parts of the question, and practice.
Remember: if there’s an elephant in the room, a good investor will find it and call it out. Address it with honesty and transparency before you’re asked. Don’t obfuscate the issue or minimize the potential impact. Own it. This is your business. Ron Conway – a veteran venture capitalist and well-known angel investor – said he’s looking for that willingness to take ownership immediately: “When you’re talking to me in the first minute, I’m thinking – is this person a leader?” Here’s some advice: be that leader. If you’re owning the successes, own the obstacles too.
Turning the Tables: Top Questions You Should Ask Investors
Although it may be tempting to imagine that any money is good money, working with investors is really about building a relationship. In the same way that you wouldn’t necessarily date each person you’d ever met, you won’t always want to work with every investor you meet. That’s okay. There will be times when your business isn’t the right opportunity for an investor, and other times when the investment being offered isn’t the right opportunity for your business. While you have little, if any, control over an investor’s decision, there are a few questions that will help you make – and feel good about – your choice. Remember these and be ready to ask them.
How would other startup founders describe working with you?
Beyond money, are there other ways you can add value to our business?
What do you look for in an investment besides the return?
Can you provide references for three founders you’ve worked with previously?
What was your worst investment, and why?
Remember: we’re all just human beings, even when one of us is wearing the investor hat and the other is wearing the founder hat. Which side of the table we’re sitting on is really inconsequential. We’re people, and most of us share similar hopes, dreams, and values. We may go about achieving them differently, but at the end of the day, we want good things for ourselves and the people around us.
How The Main Stage Can Help
That idea – of putting good into the world and finding new ways to make it grow – drives the work we do at The Main Stage. In practical terms, it involves helping founders like you:
Develop a clear, compelling, and interactive pitch that engages investors
Create a seamless pipeline for maintaining and cultivating investor relationships
Store executed agreements, correspondences, and regulatory documents
At The Main Stage, we take the hassle out of fundraising so you can turn your startup dreams into something tangible.
If you’re ready to get started we’re eager to help. Press the home button above to learn more or start your free 14-day trial. The future of fundraising is here – only at The Main Stage.
Brian A. Smith is a highly experienced investor, Co-Founder of The Main Stage, and Co-Founder and CEO of RedCrow™ Inc., a direct investment and marketing platform that specializes in cutting-edge healthcare startups. Connect with him on LinkedIn and
If movies – and certainly reality TV – were to be believed, securing funding for your startup would be fairly quick, involve a significant influx of cash all at once, and only require minimal embarrassment. Although the potential for embarrassment is never really off the table (especially early on in the life of your business), the truth about startup funding is that it isn’t nearly so scripted.
As much fun as stories of overnight success are, funding almost always takes time, and it rarely happens all at once. In fact, it’s because the entire funding process has so many misconceptions – along with its own confusing vernacular – that clarification, explanation, and some behind-the-scenes industry insights are necessary. In this guide, we’ll tackle the terminology, walk you through the key steps, and make sure you have a roadmap for navigating funding success by the time you finish reading. How does startup funding work? It’s time to find out.
A Quick Fundraising Overview
Before we go any further, remember that fundraising is a process, and like any good one, there’s more than one step involved, and a clear plan is required. In order to successfully raise capital, the process begins before you even talk with your first investor. Prior to diving directly into action, here are seven steps you’ll need to execute to get your idea funded:
Forecast your financials – how much do you need, and what do you plan to do with it?
Put together a pitch – start by reading this valuable piece on why pitch decks fail
Develop a list of potential investors – who do you know?
Schedule meetings, show up, and pitch your idea – this is the work
Have a system for receiving proposals and responding – organization is key
Navigate the (occasionally lengthy) due diligence process – keep your eyes on the prize
Prepare and execute required documentation and accept funds – it’s go time!
How Funding Works
Those seven steps almost make the entire funding process look easy, and maybe yours will be. We sure hope so. It’s worth preparing for it not to be, though. To be clear – and beyond those steps – startup funding only works if you have a good idea. You may be incredibly likable, have a well-polished pitch, and bring lots of energy to the table. Each of these is to your advantage. However, if you have a bad idea, no one is going to invest their money in your startup. Of course, there may be family and friends who want to see you succeed and are happy to push some dollars your way, but the money you need to actually get your business off the ground won’t materialize.
Let’s start with the assumption that your idea is solid, though, because, of course, it is! You’re about to turn the market upside down and you’re going to have fun doing it – if you can get the funding you need, that is. Depending on how much money your startup requires, who (and how many people) you’ll need to work with will differ. In order to keep track of everyone, it’s helpful to categorize your potential investors into groups. The importance of maintaining some order here can’t be underemphasized. Knowing who you’ve talked to, where they are in the decision-making process, and what the next steps are will keep you from feeling like you’re flailing. The flailing founder is a bad look. That’s a promise.
Organize Investors into Groups
Between your family, a couple of colleagues from the place you used to work, the friend-of-a-friend who mentioned investing that one time at a barbecue, and at least a dozen of the people you’re connected to on LinkedIn, it may be difficult to imagine any real groups at all. As your network expands, it’s worth thinking about organizing your potential investors like this:
Friends and Family
These are people you know personally or at least socially. Typically, they are some of your earliest investors, cheerleaders, and advocates. Eventually, they may not have invested the largest sums of money, but they championed your idea long before anyone else was clamoring for a chance to get on board. These are good people, and you’re lucky if you have a few of these. This group isn’t a guarantee. Remember that and don’t forget to thank them.
Angel Investors
As the name suggests, this is a special group with the ability to change the game for you and your startup. Angel investors are frequently accredited, which simply means they are someone whose:
Net worth either exceeds $1M (excluding the value of their home), or
Individual income exceeds $200,000 (consecutively for the last two years), or
Joint income (with a spouse) exceeds $300,000 (consecutively for the last two years)
Angel investors put their own money into startups in exchange for a percentage of ownership in the business or as convertible debt – that is debt that can be converted into common shares at a future date.
Here’s a tip: Look for Angel investors who are local to your area and who also invest in your market or industry. Your odds of converting this prospect into an investor are much greater when both of those boxes are checked.
Venture Capital Firms
Unlike angel investors who are investing their own money, venture capitalists (or VCs) raise capital through private equity funds. With their own trusted network of investors, VCs build interest, excitement, and – hopefully – some capital on behalf of your startup. Like angel investors, venture capitalists exchange the funds they’ve raised for a piece of your company.
Early Employees
While the first three groups probably made plenty of sense, including your earliest employees might leave you scratching your head. Here’s the deal, though: often, those initial hires are clocking in and out because they really like you or they believe in the idea. Maybe it’s both. It’s great when it’s both. Your startup has a lot going for it but the salary isn’t topping anyone’s list. In exchange for working for next to nothing, early hires will often accept shares of stock. In practical terms, these employees have more skin in the game than most. They’ve accepted a reduced wage and they’re working to help you build your business. That’s a solid investment.
Now, what about the “rounds” founders and investors are always talking about?
StartUp Funding Stages Happen in Rounds
Again, funding isn’t an overnight process. As your investor groups organize and grow, so too will your opportunities to raise capital. Of course, the needs of your growing startup will also change, as will the company’s appeal to potential investors. Here’s what you need to know about how startup funding works.
Pre-seed Funding Stage
If you’re nervous about beginning the funding process, here’s some good news: you may have already experienced your first round without even fully realizing it! Pre-seed funding typically happens when a founder (or a group of co-founders) injects their own money in an effort to get the company off the ground. Family and friends who simply want to see you succeed – that is, who aren’t investing in a strict sense – may also be included in pre-seed funding.
Seed Funding
If the pre-seed funding stage felt less than official, the seed funding series is where that changes. In this round, the focus is on growth, because that’s what seeds do. Potential investors are able to look at your business like a seed and ask themselves a few pertinent questions. For example:
How much potential does this business have to grow? (TAM = Total Available Market)
Are the conditions right for success? Is there Product:Market fit? Is there revenue traction?
Is money the only thing preventing growth or expansion? How strong is the team?
Thinking back to the groups of investors you’re working with, several of them will be drawn to this round. While friends and family may certainly take this opportunity to invest officially, venture capital firms and incubators will too. Seed funding is also a chance for an angel investor to enter the picture since they often appreciate the risk/reward ratio of a brand new venture.
Know What You Need (and Who is in Your Network)
While it’s impossible to project what a seed funding round might look like for cash in the bank for your startup, much of your success in this round will come down to need and network. Normally a good seed funding round can produce anything from five to seven figures. If your funding needs are relatively small and you have a broad network of potential investors to work with, it’s possible that your startup will receive all of the funding it needs to launch and be sustained. On the other hand, if you know you need several hundred thousand dollars or more, it’s possible that other rounds of funding will be necessary. This isn’t unusual. Here’s what you need to know.
Series A Funding
Ideally, between pre-seed and seed funding, you were at least able to get your startup off the ground. All of your funding issues aren’t solved yet, but the wheels are turning. Yes, of course, it may have been nice to raise all the startup funds and capital you needed early on, but that’s not what happened – which could be to your advantage. You have a tremendous opportunity to focus on key performance indicators – from developing a customer or client base to maintaining consistent revenue numbers.
Creating this kind of track record sets your startup apart. It’s an opportunity to demonstrate that your business is more than just a good idea. At this point, you have something tangible – some proof. As with each funding round, a key (or “anchor”) investor can often generate interest among other investors once they sign on. If venture capital firms were slow to invest during the seed funding round, know that they will be paying attention this time. Angel investors may still look for an opportunity, however, with the kind of capital that is often raised in a Series A round, private equity crowdfunding has the opportunity to create a significant impact.
Series B Funding
For startups that are past the development phase, Series B funding has the potential to elevate your business or brand to the next level. Much of the basis for Series B funding comes from unmet demand. In short, your startup may grow quickly – faster than even you can imagine. Sustained growth presents an opportunity for later-stage investing, because production or warehouse space, talent acquisition, expanded technology to boost supply takes an infusion of cash.
Companies that fall into the Series B category are well-established. Their valuations range from $30 to $60 million. As with Series A, a key investor – someone with their own track record of investing wisely – can be helpful to get the ball rolling, and you can expect even larger VC groups to get involved before the chance is gone.
Series C Funding
Businesses that navigate their way from seed funding rounds to Series C funding all have one thing in common: they are really successful. At this point, additional funding isn’t about making payroll or staying afloat, but rather things like new product development, market expansion (nationally or internationally), and/or competitor acquisitions or mergers. These are all questions of scale, and for businesses ready for Series C funding, scaling as quickly as possible is the goal.
While additional funding rounds (including Series D and E) do exist, the businesses that qualify are no longer startups in any realistic sense of the word. While a company may utilize Series D or E to pursue unmet goals in earlier rounds, that isn’t the only purpose. The kind of funding that is raised in rounds like these – typically in the hundreds of millions of dollars – is put in place for global expansion, market takeovers, or a final valuation boost before an initial public offering (IPO).
Okay…Understood, but What About…?
Organizing your potential investors into groups and understanding when and why they may be interested in making a move is important – but those aren’t your only questions, are they? We didn’t think so. At The Main Stage, we work day in and day out with founders just like you. Not surprisingly, many of you share the same questions and concerns. As you might imagine, quite a few of these questions have to do with funding. We’re going to tackle a few of the most common here. Let’s go!
“How do startup companies receive funding?”
You may not believe just how frequently we hear this question, and typically it’s asked almost apologetically. Cut yourself some slack, founder. If this is your first startup or even the first one you’ve gotten this far into the funding process, the process is brand new. There are no bad questions. Here’s what you need to know:
Rounds of funding through investors, as we’ve described above, are one of the ways startup companies receive capital, but they aren’t the only ways. Here, in no particular order, are a few others you should at least be aware of:
Self-Funding (or, “What’s in Your Wallet?”)
Self-funding is often referred to as bootstrapping because, well, you’re effectively pulling yourself – by way of your startup – up by your own bootstraps. Whether you have savings or the ability to liquidate some assets, self-funding isn’t without at least two key advantages:
Using your own money allows you to retain full ownership of your business
You can avoid paying interest
Borrowing Money
Interest, of course, can become an issue when you borrow money. Frequently, startup founders apply for loans through some combination of traditional banks, the U.S. Small Business Administration (SBA), and online lenders. Unlike the groups of investors we helped you break down earlier, these lenders won’t be interested in ownership stakes, but they will expect the loan – with interest – to be repaid.
NOTE: One particularly helpful program is the SBA microloan. Designed specifically with startups in mind, the microloan has term lengths as high as seven years, relatively low fees, interest rates that tend to range from 6% to 9%, and low amounts up to $50,000. If pre-seed of seed rounds were uninspiring, if you need a smaller amount to launch your startup, or if ownership (especially early on) is important to you, one of these programs might be advantageous.
“How do investors get paid back?”
It’s a common concern and one that’s kept many founders awake at night. Exactly how do investors make their money back? Here’s a hard truth: Sometimes they don’t. We need to address that upfront before we go any further. Despite all the work, each and every hope or dream, and even thousands – or hundreds of thousands – of dollars, sometimes an investment fails. Startups stop. People try again. It happens. Reward almost always includes some degree of risk. The more risk, the higher the reward.
Now that the hard part is out of the way, let’s focus on the reward. Let’s imagine that one or more round of funding was sufficient and you have made the most out of the capital invested. Bravo! Here’s some more good news: Those investors were not lenders. Whether you had an angel investor, a few venture capitalists, or a group or family, friends, and colleagues (or some combination), they didn’t invest their money in exchange for repayment with interest. These were not loans. They were investments into your company in exchange for a share of ownership – typically in the form of stocks or shares. As your startup grows into a full-fledged business, these shares continue to grow in value. These shares can payout significantly when there’s an exit – that is when your company is sold to or acquired by a larger competitor.
“How long does it take to get funding for a startup?”
Once you’ve made a decision to launch your startup and pursue some form of funding, the days, weeks, and months that follow can often feel like a race against the clock. Other times it may seem like that clock is standing still. Like any good founder, you’re eager for there to be money in the bank because that will allow you to make more products, hire more employees, or invest in better technology.
Much of the timeline, for good or bad, will come down to you – the founder. If you’re a relatively unknown quantity – as most startup founders are – funding may take a little longer than it would for someone who’s had some previous successes (e.g. businesses that launched, grew, and were acquired). We’re talking months, not weeks. Possibly longer. Likewise, if you initially have a small network of investors, it might be harder to get the funding ball rolling. Again, this underscores the importance of the organization we mentioned at the beginning. Know who’s in your network, build those relationships so that you can connect to their networks, and watch your business grow.
On average, the fundraising rounds we broke down earlier take place every 12 to 18 months, however, a good seed round can potentially replace the need to raise any more capital. The time spent between rounds is often reserved for the due diligence process.
The Bottom Line
For founders who just want to go to work building their dream or putting their idea into motion, fundraising can feel unnatural, overwhelming, and even confusing. No one understands that better than we do. At the Main Stage, each member of our team has walked the journey you’re now on. We’re investors, start-up founders, and, well, real people who know the ups and the downs of forecasting, pitching, building a network of investors, and finally – thankfully – seeing that hard work pay off.
That’s good news for one reason in particular: It means we can help you. Whether you’re:
creating the perfect pitch on our Story Vault™ platform;
organizing and managing those investor relationships in our proprietary CRM system;
or closing the deal and putting cash in the bank with our industry-compliant Data Vault;
The Main Stage is how and where fundraising happens. Are you ready to get started? So are we. Click here for a chance to learn more and sign up for a free 14-day trial.
Aishlin Harrison is the co-founder of The Main Stage, as well as an artist, musician, and passionate entrepreneur. In addition to these roles, she serves as Creative Advisor for RedCrow™, Inc., a direct investment and marketing platform for healthcare companies. You can connect with her on LinkedIn.
